Why Google is wary of Samsung's growing power

Samsung's dominance in the smart-phone market has raised some questions about whether it will renegotiation the terms of its arrangements with Google, hurting the search-engine company's mobile-ad business.

Kim Hong-Ji/Reuters/File

Google is concerned with how Samsung's growing power might affect their partnership. Here, a man walks by a Samsung advertisement in Seoul, South Korea.

Executives at the search-engine giant are concerned about Samsung's rising dominance in the Android market, according to The Wall Street Journal. The South Korean company’s success could lead to a renegotiation of its arrangement with Google or otherwise undermine its mobile-ad business.

Google may be trying to save itself from an ascendant Samsung with its recent acquisition of Motorola Mobility, which makes Android-based smart phones and tablets, according to the Journal.

Samsung has risen to the top of the smart-phone market over the past year, reporting a $8.27 billion profit in its Q4 earnings of 2012. Galaxy products outsoldiPhones for most of 2012, dominating the global market.

While Google had strong earnings in the fourth quarter, it is struggling with the decline of desktop searches and the rise of mobile searches, where Google makes less money. The cost-per-click that advertisers pay Google decreased by 6 percent from the fourth quarter in 2011, though it increased by 2 percent in the third quarter of 2012.

James Kendrick of ZDNet says Google should be concerned about Samsung, and so should its partners. Why? Because Samsung is the only Android maker that matters.

“Samsung’s sales of both smart phones and tablets are far ahead of not just other Android players, but also of the entire Android ecosystem,” Mr. Kendrick writes. “Samsung is Android.”

What sets Samsung apart is its ability to build a phone with strong hardware and features and implement Android customization that caters to its customers, he notes. Samsung’s ability to dominate the market could give the company leverage to ask for cuts in the search revenue.

Chris Silva, a mobile industry analyst at Altimeter Group, notes that Google seems to be the victims and the beneficiaries of their own success when it comes to Android, from fines for fragmentation to concerns about Samsung looking for cheaper ad prices.

"Google's in an interesting spot as far as Android goes," Mr. Silva says. "Win or lose, they always have some sort of issue."

Aside from the possibility of renegotiations, Google is likely concerned about Samsung customizing Android to the point where it prevents customers from getting a sense of the Android experience.

"Users see an app, and they see a range on the screen and that to them is what the experience is," Silva says. "If Samsung or HTC try to define what that is, it waters down what Google's experience is."

Google’s concerns also call into question what success the company will have with its Nexus devices. These flagship Android devices -- which in the past have been made by Samsun, HTC, and others -- have been well-received, Silva notes, but the appeal is limited to a very tech-savvy crowd that’s looking for a pure Android experience. Samsung’s Galaxy products are clearly much more popular.

While it is too early to tell how well Samsung and Google will perform in the mobile industry in the following months, it is clear that Google will have to decide whether it wants to dominate the market with the ubiquitous Android OS or control its sales in products that bring the most profit and exposure, Silva says.

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“They want to serve the Android ecosystem and they have a hard time when they’re competing for head space with Samsung and others,” he says. “They can’t keep their control-of-brand mind happy if they’re keeping their ad revenue and the number of-search-queries happy.”